From Les Leopold:

No matter what Rick Santelli proclaims, government interference didn’t cause the crash. Greedy, stupid home buyers didn’t cause the crash. Poor people backed by the Community Reinvestment Act didn’t crash the system. And China didn’t cause it either. The book should be closed on this: Wall Street’s fantasy finance casino did us in. (Please see The Looting of America for a fuller account.)  Source

From The Motley Fool:

Why don’t they walk away?
An interesting quirk of economics is that the dismal science generally assumes that all agents in an economy work in their own best interest. But this doesn’t always happen in real life.

The mortgage crisis is a case in point. For many of the underwater homeowners in today’s market, paying down their mortgage isn’t really in their best financial interest. Particularly in states like Arizona — where mortgages are nonrecourse, meaning the lender can’t go after any of the homeowner’s assets other than the property itself — it makes little sense to continue paying a large mortgage on a devalued house when comparable rental rates are far below the monthly mortgage payment.

The situation had University of Arizona law professor Brent White scratching his head, and as a result he wrote a very interesting paper on the subject, which University of Chicago luminary Richard Thaler brought to an even broader audience over the weekend.  Link to article…

From Market Watch:

In retrospect, all of that bailout money should have been earmarked for Wall Street bonuses. Without deep cash, your bankers are probably considering jumping to more lucrative jobs elsewhere, perhaps in Major League Baseball or playing the lottery. They’re not focused on stabilizing the financial system, and the resulting problems are our fault for questioning you. Understand that we don’t get paid the big bucks for a reason.

No, we just have our shrinking 401(k)s, our individual retirement accounts and maybe, if we’re lucky, our homes. We’re too dense to see how bulletproof the financial system is and really no amount of taxpayer support could ever pay you back for all of the good times we’ve had during the last two years.

So, Wall Street, forgive us for our meddlesome ways. Forgive us, and Paul Volcker, for wanting a return to boring old banking. Forgive us for the sarcasm.

Most of all, forgive us for ever trusting you in the first place.  Link to article…

From Chicago-based finance consultant Janet Tavakoli:

Taxpayers currently subsidize banks with cheap money supplied by the Federal Reserve. Even banks that nearly crashed our economy borrow at nearly zero interest rates, while some consumers pay nearly 30% on credit card debt.

Banks enjoy a Term Asset-Backed Securities Loan Facility (TASLF) that allows them to borrow against problem assets. New banks have each issued tens of billions in FDIC guaranteed debt through the Temporary Liquidity Guarantee Program (TLGP). Banks get interest payments on the excess reserves they keep with the Fed. Accounting rules were changed in March 2009, so banks make up their own prices for assets and more easily hide losses. These are only a few of many newly-created hidden subsidies.

Taxpayers are paid only peanuts in fees for these massive subsidies while being squeezed with high interest rates and mortgage foreclosures–after our economy was devastated chiefly by several banks’ malicious mischief.

What has the financial crisis taught us? Among other things, we should show Bernanke and Geithner, enablers from the previous administration, the door. Paul Volcker is right to ask for a return to Glass-Steagall. It worked until it was eroded over several decades by bank lobbying. Banking and speculative trading activities–even when done for “customers”–don’t mix.  Link to article…

I want to offer a full endorsement of this PBS documentary from Frontline called The Warning.  The story of the infamous “Over The Counter Derivatives Market” is one we are still living with today.  As it’s described in the program, this is a “dark market”, unregulated, and virtually impossible to monitor as a result.  While regulatory legislation has been proposed, the most powerful lobby in Washington has managed to hold it up— the finance lobby.  Derivatives are described in somewhat euphemistic terms as “insurance policies” that, ironically, are supposed to hedge against all sorts of potential forms of loss.  It seems a more common understanding of the concept of a derivative is that it’s a casino bet— and today, this casino amounts to a total market of hundreds of trillions:

According to the International Swaps and Derivatives Association (ISDA) survey, the outstanding notional amount of derivatives is over 454 trillion dollars at mid year 2009. The Bank for International Settlements puts the number at nearly $800 trillion worldwide. Using ISDA data, that is over 30 times U.S. GDP. According to the flow of funds data from the Federal Reserve, total credit market debt outstanding is just under $53 trillion dollars. Derivatives are not a minor dimension of U.S. or international capital markets. They occupy a dominant position.  Continue reading…

In the documentary, the “warning” comes in the late 1990s from the head of the Commodity Futures Trading Commission, Brooksley Born, who identified how this “dark market” could lead to catastrophic financial losses.  Her prophecy came true as early as 1998 when a premier investment firm called Long Term Capital Management was basically flipped on its head by losses in derivatives and was ultimately rescued by 14 investment banks who each picked up portions of the billions of dollars needed to prevent the collapse. 

The story also focuses on the former regulators in place including Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin, Assistant Treasury Secretary Larry Summers, and Securities and Exchange Commission Chairman Arthur Levitt.  According to the documentary, with a firm conviction toward reducing regulation and allowing markets to correct themselves, these regulators derailed efforts by Ms. Born to bring this dark market into the light.  And even after the worst of Ms. Born’s predictions came true with LTCM, still no regulations of the market were subsequently enacted. 

In February of 2008, former Federal Reserve Chairman Alan Greenspan testified before Congress on this subject after the biggest financial collapse since the 1930s had ensued— and his response to the committee’s questioning of his ideological choices about regulation:

The congressional committee’s Democratic chairman, Henry Waxman, pressed him: “You found that your view of the world, your ideology, was not right, it was not working?” Greenspan agreed: “That’s precisely the reason I was shocked because I’d been going for 40 years or so with considerable evidence that it was working exceptionally well.”

Still today, this market is unregulated.  And still today, according to Brooksley Born’s statements in the program, the risk of catastrophic financial loss from this dark market remain. 

I think there are few stories in today’s headlines as important as this one.  Please take time to learn about this part of our financial system.  It’s up to us citizens to demand that Congress takes responsibility for protecting the public from the perils of “dark markets”.